Gasoline prices are on the rise again. In the last 34 days the average price of gas has increased 46.4 cents, or 22.6 percent.Nationally, it hovers at just over $2.50 a gallon.
In a previous blog post, I complained about my personal problems with high gas prices and how they affect my budget. At the time, the local pump price was around $2.35 a gallon. Today, it stands at around $2.50 or more. I and many others believe that if gas prices rise unchecked as they did last year, there will be a corresponding negative impact on the economy at large. But that hasn’t stopped prices from going up, up, up.
So why are they on the rise? Demand, at least here in the good ole’ USA, is still down. Petroleum supplies are way up.
One financial web site has a good explanation and cites three reasons: An expectation of an improving U.S. economy, a weaker dollar, and higher demand from China’s manufacturing sector.
It is a fascinating dance being held on a global stage: In one corner are speculators betting that the U.S. economy, and the global economy for that matter, is poised for a rebound, so they start to bidding up the price of oil.
“The bottom line is that the optimism on the economy is causing the oil markets to anticipate, and price in, tighter and more supportive oil fundamentals in the future,” said Societe General analysts Michael Wittner and Remy Penin in a Dow Jones Newswire report. “If market sentiment turns negative again, the focus will shift back to current fundamentals, which remain weak, and prices will go down.”
Translated into English, this quote seems to mean that if oil speculators think the economy’s going to keep getting better - based on their reading of the stock market - they’ll keep bidding up the price of oil. If they think it’s going to get worse, they’ll bid it down, so the price will follow.
In the other corner are economists and consumers, who fear the negative impact a price hike could have on the economy:
“There are two forces standing in the way of prices moving higher - the fact that OPEC may not want to let prices go too high - which on recent evidence it has given no indication that is the case - and the economy. For our economists, one of the biggest dangers facing the recovery is a sharp run-up in oil prices,” analysts at JP Morgan said in a Wall Street .
The irony is rich. On the one hand, as the economy gets better, oil prices will go up as demand increases and oil-producing countries start sticking it to the consumer again. On the other hand, if oil prices go up too high, the economy won’t ever get better.
One question in all of this is: How do you determine if the economy is getting better? One easy way is to watch the stock market, which most people seem to think is a barometer of the economy. (I have my own theory on that. For example, why is that when unemployment numbers go up, the stock market goes up? Or why, when GM goes into bankruptcy, does the stock market go up, like it did yesterday? There seems to be a kind of gallows logic to the stock market, but I digress.)
CNNMoney.com explains it this way:
“Investors use stock markets as a bellwether for the economy, and a stronger economy demands more energy. In recent months, oil prices have largely tracked stock markets because investors bet that as the economy goes, so goes demand for oil.”
Stock brokers, on behalf of their customers and themselves, are bidding up the price of stocks because they think the economy is going to get better, which is exactly what oil speculators are doing for the price of oil.
So what’s the perfect price point? Currently, the price of a barrel of oil is around $68, and pump prices for gasoline are about $2.50 on average. OPEC seems to think the price will stabilize at around $75 or $80 a barrel by year’s end, which would put the pump price at around $2.75 a gallon.
Which I guess is better than $4 a gallon.
